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The S&P 500 index increased 0.2% on Thursday with volume higher than Wednesday and above the 30-day moving average volume. This marks 3 days in a row where the index increased with volume above both the previous day and above the 30-day average. If the S&P declines on Friday by about 16 points (-1.2%) then our forecast would likely change to uncertain.

Subjective Comment:

The recent market volume is not incredibly high based on longer-term norms, but it has been strong versus more recent dates. The magnitude of the index increase the past three days might not seem like much, but each has been on increasing volume. This is a bullish pattern.

The weekly money supply statistics were published by the Federal Reserve on Thursday. The data released on February 9, 2012 had revisions going back at least 19 months, causing some of the historic growth rates to change slightly. The overall trends continue unchanged through the end of January. The Seasonally Adjusted M2 had what appears to be an adjustment jump the first week of January. Otherwise the trend-line growth rate is unchanged since August of last year. We have been reporting this rate as being in the low 4% range. With the data revisions the rate is now in the mid 5% range, but again we stress the change is a data revision and not a change in the trend.

The Non-Seasonally Adjusted data shows the same straight-line trends continuing with growing variability. There is a lot of noise in the NSA data and there is no definite change in this series. However, the growing variability does seem to suggest a slowing of the growth rate. Also worrisome in the NSA M2 is the fact for the past 4 weeks the money supply has been declining and remains at the same level as two months ago. The NSA & SA M2 data does not clearly show if the growth rate is steady or slowing. Either way the absence of accelerated growth is disturbing as the current bubble-boom in the US economy and stock markets will not sustain itself if the money supply growth remains where it is. We remain cautious regarding the M2 trends.

Looking at the US bank reserves we noticed Required Reserves appear to be growing at a faster rate. This means US banks are originating loans faster, and that will cause the money supply to grow. The Excess Reserves also showed an up-tick along with the monetary base (M0), both SA and NSA. The Federal Reserve is likely having to print more money (M0) to keep rates near zero. The change in the reserve data could be statistical noise, or it might indicate the future updates to the money supply will soon show an acceleration in the growth rate. To get another idea of the possible growth rates of the US money supply we reviewed the charts published at Shadowstats.com. Their growth rate percentages are calculated using the year-over-year method instead of the curve-fit method we used. This analytical difference is of little consequence but it does explain the subtle difference between their numbers and what we publish here. Looking at year-over-year growth rates we see that M2 and M3 have been accelerating recently. This suggests the manipulated bubble-boom in the US economy will continue from here.

Putting all of this information together it appears the US economy and stock market will continue upward. Now is the time to invest in leveraged index funds to take advantage of the coming market growth and to stay ahead of the price inflation that is coming. When central banks expand the money supply price inflation always happens. The only unknown is how long it will take before the price inflation will arrive, but it always does. For the most recent example, see the current price inflation in China thanks to the money printing by the People’s Bank of China. Money printing also ends in a crash which will happen soon in China. For the US, the inevitable contraction is far enough in the future that investing now is what we recommend.

One Response to For Friday, February 10, 2012, the market forecast is a growth-trend

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